In an NBER working paper issued in April 2016, Secular Stagnation in the Open Economy, Gauti B. Eggertsson, Neil R. Mehrotra and Lawrence H. Summers look at conditions of secular stagnation – low interest rates, below target inflation, and sluggish output growth – that now characterize much of the global economy. They consider a simple two-country textbook model to examine how capital markets transmit secular stagnation and to study policy externalities across countries. They find capital flows transmit recessions in a world with low interest rates and that policies that trigger current account surpluses are beggar-thy-neighbor. Monetary expansion cannot eliminate a secular stagnation and may have beggar-thy-neighbor effects, while sufficiently large fiscal interventions can eliminate a secular stagnation and carry positive externalities.
Secular Stagnation in the Open Economy
April 28th, 2016